WASHINGTON (CNN) -- The State Department failed to seek $55 million in penalties from the American security firm once known as Blackwater for not properly complying with its security contract for protecting diplomatic personnel in Iraq, an audit shows.

The audit -- issued on Monday by the Special Inspector General for Iraq Reconstruction and the State Department's Office of Inspector General -- said the company didn't provide proper manpower for its units and exposed officials to "unnecessary risk."

"We found that Blackwater did not maintain the required number of personal security specialists, designated defensive marksmen, emergency medical technicians, and explosive detection dog handlers," the audit said.

But, the audit said, "penalties for noncompliance with contract staffing requirements were not assessed" and added that "we estimated deductions totaling $55 million applicable to manpower shortages during 2006 and 2007."

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"We believe that the full manning of protective details is important to the safety of the principal being protected, as well as to the numbers of the protective detail. As a result, we concluded that insufficient manning exposed the Department to unnecessary risk that could have been avoided by full staffing," the audit said.

The North Carolina-based Blackwater, now known as Xe, was contracted by the State Department to provide security protection for diplomats in Iraq. It was replaced this year by another company, Triple Canopy, after a September 2007 shooting in Baghdad in which at least 14 civilians were killed.

Five former Blackwater security guards pleaded not guilty in January to charges of voluntary manslaughter and other serious crimes stemming from their involvement in the 2007 incident. A sixth former security guard has pleaded guilty to charges of voluntary manslaughter and attempted manslaughter.

The Iraqi government had refused to issue Blackwater a license to continue operating in the country.

As for the $55 million in dispute, government officials were "asked why Blackwater had not been charged deductions for the shortage in personnel, as the contractor specifies.

"The contracting officer stated that since Blackwater was meeting the services required, there was no need to invoke the deduction clause set in the contract. The contracting officer added that the Department had never invoked the deduct clause in the contract and therefore had lost the right to do so."

As a result, the U.S. government audit -- which looks at more than $1 billion in State Department contracts with Blackwater from 2004 to 2008 -- has called for a legal opinion into "whether charging deductions for past inadequate staffing would be appropriate." It said that if such an opinion would be affirmed, "appropriate deductions" for the full contract period should be calculated.

Auditors said the State Department agreed with the recommendation for a legal opinion.

Anne Tyrell, a Xe spokeswoman, said the "government contracting officer determined that Blackwater was compliant with the terms and conditions of the contract at the time for which they were reviewing and therefore did not apply any deductions or penalties. Blackwater only billed for services provided."

The audit made other findings.

The State Department has done a "commendable job in providing oversight of weapons and vehicles provided to Blackwater" but not with "all other government-furnished property."

Department officials didn't "establish or perform measures to confirm the accuracy of labor costs used as the basis for contract billing." It said contract oversight files "were not easily accessible."

Also, it said travel costs were not properly reviewed. It cited "ineligible travel costs of $127,364 paid for airfare in excess of coach fare" and noted that $56,457 had been recovered by a contracting officer.

The audit recommended a full-time contracting officer's representative to be on site in Iraq.